Clinton’s Estate Tax Hikes Discourage the Investments that Drive Growth

Pundits and commentators have focused a lot on the differences in policy between Trump and Clinton on issues such as immigration and national security. Often overlooked is the issue in which they differ perhaps most sharply: the estate tax, commonly referred to as the death tax. Trump, along with congressional Republicans and many economists, would repeal the estate tax. Gary Johnson, the Libertarian candidate, wishes to replace individual/corporate income taxes, payroll taxes, estate taxes and gift taxes with a single consumption tax. Clinton therefore differs greatly in that she has recently proposed a massive hike in the estate tax. Clinton’s justification for this is that the estate tax affects a small percentage of estates, only 0.2% of Americans who die every year. While this is true, it is no justification for what is ultimately a bad policy.

Currently, inheritances are taxed at 40% on estates worth more than $5.45 million. Clinton originally planned to raise the rate and expand it to 45% on estates worth over $3.5 million. A moderate increase relative to Clinton’s latest plan, but even that would, according to the Tax Foundation, reduce the size of the U.S. economy by approximately $20 billion annually.

Clinton’s new plan is a whole other animal. She now proposes to raise the death tax to 50% on estates worth more than $10 million, 55% for estates worth more than $50 million, and a staggering 65% for estates larger than $500 million. Moreover, she plans to repeal the cost basis step-up, a rule which allowed for heirs’ inherited assets to be assessed at their market value at the time of inheritance, rather than at their value when originally purchased by the testator. Repealing this important element of inheritance law would leave heirs with a much heavier financial burden and make it more difficult for heirs to liquidate assets in order to pay off the death tax.

Some estimates show that even a 45% estate tax without the cost-basis step-up, combined with state inheritance taxes, would leave the United States with the highest effective estate tax rate in the world. A 65% estate tax rate, especially with the removal of the cost basis step-up, would leave many family-owned businesses, especially farms, facing forced liquidation of large amounts of their assets.

The death tax already has significant problems to begin with even at the 40% rate, which is why many members of Congress and Trump want to repeal it. It is a tax with seemingly no logical foundation; it creates a strong incentive to live profligately and die broke, rather than setting aside savings that would end up in the grasping hand of the tax man.

This means that Americans who could be hit with the estate tax would stop saving, and when Americans stop saving, investment grinds to a halt. Moreover, they spend millions of dollars on top lawyers and advisors in order to plan for the tax and find ways to avoid it; all this money is capital which would otherwise be saved and invested into growing the economy and providing jobs.

A 65% rate with the cost basis step-up repealed might sound good to those who are concerned about economic inequality, but Clinton’s proposed estate tax plan will cause significant harm to the economy. Clinton may wish to levy the estate tax to improve the fortunes of the middle class, but drastically increasing a tax which provides all the wrong incentives for economic growth (and barely raises any tax revenue anyway) is not the way to do it. Americans should support repealing the estate tax rather than shooting themselves in the foot with an irresponsible and exorbitant tax.